2.8 Corporate Risk Management

Financial risks that the CBRT may be exposed to due to its operations are composed of credit, market and liquidity risks, and are managed in coordination with business units. A significant portion of the financial risks that the CBRT is exposed to due to its operations emerges in the course of fulfilling legal duties such as implementing monetary and exchange rate policies, managing foreign exchange reserves, and providing certain banking services to the banking sector and the government. Financial risks that the CBRT encounters while implementing monetary and exchange rate policies in its capacity as the monetary authority are a consequence of the policy targets chosen. On the other hand, financial risks related to the FX reserve management result from investment preferences. Meanwhile, the CBRT manages its reserves in a conservative manner in view of the priorities defined by the CBRT Law No. 1211.

The credit risk that the CBRT is exposed to originates mainly from investment transactions conducted in reserve management, and open market operations (OMO), Interbank Money Market (IMM) transactions and intraday liquidity transactions conducted to provide short-term liquidity to banks as part of monetary policy practices, as well as from transactions conducted as part of exchange rate policy implementations. The CBRT’s credit risk arising from monetary and exchange rate policy-related transactions is managed by collateralizing the whole amount of transactions, including a specified amount of margin, with balances held in the related accounts and securities of very high credit worthiness that can also be traded on secondary markets, as well as by asking for additional collateral when needed. Moreover, for some transactions, the payment-after-collection method is adopted and thus, the credit risk exposure is largely minimized.

Management of the credit risk exposed to during the management of international reserves has a three-tier structure. Firstly, investment transactions are limited to prominent international financial institutions and borrowers with high credit quality that meet the credit rating requirements set by regulations. Secondly, with a view to controlling all credit risks arising from the transactions, the total credit risk limits that can be allocated to the institutions with which transactions are made are confined to a certain proportion of the manageable reserve. Finally, credit risk limits are allocated to each selected institution using basic and financial analysis methods. Accordingly, compliance with the defined limits and constraints was monitored and reported to the senior management.

In management of reserves, market risk can be encountered due to exchange rate, interest rate and price fluctuations in international markets. Meanwhile, liquidity risk stems from the probability of incurring loss when meeting sudden and unpredictable FX liquidity needs. Accordingly, to manage these risks, compliance with the limits set by the benchmark portfolio was monitored and reported to the senior management.

Other than the financial risks related to FX reserve management, those risks on the CBRT’s balance sheet pertaining to credit, market and liquidity were also measured, monitored and reported.

Under the operational risk management, operational risk factors of processes at the CBRT are assessed and reported in collaboration with business units. Meanwhile, operational risk incidents during the implementation of processes are registered in incident record reports. Accordingly, operational risk assessments in 2023 were made through the monitoring of corrective and preventive action plans for the risks reported by units in incident records. On the other hand, studies were carried out to define the processes of business units that are critical for business continuity.

Lastly, the CBRT‘s compliance with the national and international standards and legal regulations regarding the prevention of laundering proceeds of crime and financing of terrorism was ensured, and compliance activities were carried out in order to prevent risks that may be exposed in this regard.